S.Hares from Five down (NASDAQ: FIVE) traded significantly higher after the company announced excellent third-quarter results after the market closed on Wednesday.
Investors got a welcome surprise as the stock had fallen in the week leading up to earnings reporting, but Five Below is still high despite the supply chain problems currently challenging many retailers.
The stock isn’t cheap and trades at a relatively high P / E ratio of around 40, but more results like the one we’ve just seen could support a higher stock price looking towards 2022. Here are three things from the report that highlight why Five Down is such a formidable retail store.
Image source: Five below.
1. Growth where it matters
Total sales increased by 27% compared to the previous year. In the third quarter, Five Below achieved the highest average store sales in the company’s history. The additional demand during the quarter helped offset higher transportation costs and resulted in an impressive 75% year-over-year increase in operating profit.
“The ability of our teams to identify trends and capitalize on them quickly is a key differentiator and strength of our model,” said CEO Joel Anderson during the conference call.
It’s no coincidence that Five Below did this in a quarter where consumers are under pressure with higher goods prices. Higher inflation could act as a catalyst for more demand in the fourth quarter of fiscal as consumers search for the best price for gifts this Christmas.
2. Deliver value above the price of $ 5
One growth catalyst to watch is Five Below’s efforts to sell items above its traditional range of $ 5 or less. As the company grows and increases its purchasing power with suppliers, it will be able to source higher priced goods and offer customers even better quality and savings. Management is happy with the results so far, citing its recent offer of $ 12 telescopes and a $ 2.50 basketball hoop.
Additionally, customers who purchase Five Beyond products typically spend more than the average customer. These high spending clearly contributed to Five Below’s record average sales last quarter. The “Five Beyond†category should expand to half of the chain by the end of next year. It currently accounts for about 30% of the business.
3. Space for more store openings
Overall, new businesses make the greatest contribution to sales dynamics. Five Below opened 52 new stores in the quarter. This brings the total fleet to 1,190 stores in 40 states, but management continues to see potential for more than 2,500 stores in the long term.
The number of stores has grown by 21% per year in the past. Plus, stores have consistently posted positive comparable sales growth, with the exception of the temporary store closings during the pandemic. This gives the company a long-term runway for revenue growth.
Most importantly, Five Below has proven that it has a profitable business model for selling goods at ultra low prices, making it a resilient retail business during a recession. Consumers will, of course, buy more value when the economy slows or inflation rises, as has been the case recently. This scenario benefits Five Below.
Of course, long-term investors should always consider how much value they will get for buying company shares. Given Five Below’s ability to continue to open new stores, the stock’s price-to-earnings ratio of 40 doesn’t look overly expensive based on this year’s earnings forecast. Investors shouldn’t be afraid to open a position in the stock at this level.
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John Ballard has no position in any of the stocks mentioned. The Motley Fool recommends Five Below and recommends the following options: long January 2022 $ 115 calls on Five Below and short January 2022 $ 120 calls on Five Below. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
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